Stock of the Day
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Lear Corp. (LEA)
Lear Files Chapter 11
Bankruptcies have almost become as common as job layoffs during this downturn in the economy. It seems like every other month another company has folded under the pressures of a struggling economy and been forced to file bankruptcy to salvage what's left of the company. Some bankruptcies have been a direct result of a company's dependence on a specific industry. Seat maker Lear Corp. definitely falls into that category. The company announced that it filed for Chapter 11 bankruptcy protection on Tuesday. What factors pushed the company to make this drastic decision? Will the company be able to prevail after this reorganization?
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| Stock Analysis |
At one time, stories of a declining automotive industry littered headlines across multiple news outlets. Month after month more automobile companies reported steep declines as consumers stopped purchasing cars. Some companies even reached a breaking point and had to turn to the government for a bailout. It was almost certain that other industries that relied on business from automobile companies would soon see a decline in business as these companies continued to struggle. This initial observation has become true and Lear became the third auto-parts maker to file bankruptcy over the last 30 days. Demand for Lear's products began declining in late 2005 and the global economic slowdown in 2008 pushed the company further into red. As demand for automobiles declined so did the demand for Lear's products. Demand was not the only factor that pushed the company to file for bankruptcy.
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Large amounts of debt ushered in a whole new set of problems as the company tried to address a decline in demand. Lear raised the possibility of bankruptcy on June 1 after electing to use a 30-day grace period to skip an interest payment of about $38 million. The period was used to reorganize Lear's debts. Lear has implemented a number of cost cutting strategies, but none of them have been able to get the company back on the positive side of the flat line. The company reported that it expects revenue to continue to drop by 33% during the year. The company is hopeful that it will be able to make a rebound in 2011. Does the company really have that much time to make a rebound?
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This bankruptcy filing may provide the company with a window of opportunity. It's hard to predict how the company will emerge and perform after its bankruptcy, but a rebound in the auto industry is necessary to fuel Lear's recovery. Last year, 80% of its sales came from now bankrupt General Motors and Ford (F: Charts, News, Offers). Similar to GM, investors and interested parties will simply have to wait to see how the company manages after the bankruptcy. Hopefully, for the sake of preserving jobs, the company will emerge stronger and be able to make a recovery.
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Profile |
Click here to view a detailed profile of Lear Corp..
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